Questions about ROI

7 Replies

Hey guys, 

I'm still starting out and learning quite a bit about a lot of this stuff, so bear with me. I'd like a little clarity on the mortgage payment you make as an investor. Say I put an out of pocket 20,000$ down payment on a house, and it's bringing in X amount of $ a year. Am I essentially making 0$ until I pay myself back the initial down payment? 

And of course, the other side of that question is if I took out a loan to make the downpayment of 20,000$, I don't start paying myself back until the lender has been paid back? 

Thanks!

Sam Garner | [email protected] | 469‑323‑9937

Depends in how you want to look at that down payment. When I put money down I do not think if it as I am spending my money (like buying something at the store) I am investing my money (like a bank account, only much better). So I am making money immediately on a good property regardless of the money I put down. How much are you making each month on the money you have in the bank?

Maybe others can chime in but I don't think you can borrow money for a down payment. The loan company wants that money to be seasoned in your bank account for I believe 6 months.

If I buy a dividend paying closed end fund (mutual fund) that pays me 12% in dividends a year, all things being equal (the stock price doesn't move and I just collect dividends), yeah, I'd say I am making money.  

I invest the 10k in the stock, and I hold the stock, theoretically worth my 10k, plus they pay me 12% a year (1% a month dividend payment every month).

I don't think a house is any different, all things being equal.  You put 20k in to buy that house, so that's your 'skin', but you haven't lost it.  It is just not liquid.  So, in theory, if you were to sell the house for the exact same amount, you would have 20k plus your net cash flow per month.

I'm a new guy here so I don't want to sound like I know things yet lol, but I do like to own dividend paying stocks, so this question called to me.  Hope I helped.

Thanks guys for chiming in. 

I guess the hurdle I'm having in my mind is that I don't see a house being as liquid as a mutual fund, or any stock for that matter. The whole point in buying and holding is to hold, so you never see that downpayment come back to you, assuming you never sell the house.  I don't know how ignorant of a statement that is. It seems in my mind that you pay a downpayment so you have the opportunity to collect monthly rent at some point in a couple years. I don't see it as instant income, I see it as being in debt for whatever amount the downpayment was. 

I'm sure my perspective will change once I get involved in it a little bit more. 

Sam Garner | [email protected] | 469‑323‑9937

it's really up to you to determine what you consider a return (Gain) and what you determine cost. When I calculate my ROI, I include my down payment in my ROI. Download one of the BP analysis tools, and plug in some numbers and see what makes sense to you.

Originally posted by @Sam Garner:

Thanks guys for chiming in. 

I guess the hurdle I'm having in my mind is that I don't see a house being as liquid as a mutual fund, or any stock for that matter. The whole point in buying and holding is to hold, so you never see that downpayment come back to you, assuming you never sell the house.  I don't know how ignorant of a statement that is. It seems in my mind that you pay a downpayment so you have the opportunity to collect monthly rent at some point in a couple years. I don't see it as instant income, I see it as being in debt for whatever amount the downpayment was. 

I'm sure my perspective will change once I get involved in it a little bit more. 

 Sam,

There is a payback period with a rental property, just as there is with any investment.  If you bought that dividend paying stock, you would need to collect dividends for X-months before you had received payback equivalent to your initial investment.   If you buy a rental property, you will need to collect the CFBT for X-months before you receive payback equivalent to your initial investment.  [If we consider the effects of taxation in either case, your hold period will be longer].

The main difference, for the purpose of this dialogue, is the liquidity of the investment.  If you need to have your capital back, you can liquidate your dividend stock more readily than your rental property.

That said, real estate has a feature that cannot be matched by the dividend stock: the ability to use leverage.  If you purchase a rental property with 20% downpayment, your tenants will pay for the other 80% ... sure the mortgagee makes a healthy return [ :-D ], but in the end, you own 100% of the property are all but guaranteed to get your downpayment - plus much more - back when you sell.

Medium greenapartmenthires 1024x1024Roy N., Louer Louer Ltd. | 1.506.471.4126

Great comment on my stock example.  

RE is a bit more difficult to calculate ROI than stocks. Stock investments can easily be calculated by dividing profit by investment. RE, on the other hand, has several different factors at work that make it impossible to calculate ROI without factoring in these other numbers. Also, keep in mind the different benefits you get from RE ownership that don't come with stocks and bonds such as depreciation, tax benefits, etc. There are several formulas you can find right here on BP to calculate different forms of return.

No company avatar mediumJohn Thedford, John Thedford | 239‑200‑5600 | http://www.capehomebuyers.com

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